By Jayashree Jakhade

No doubt India's fiscal situation is alarming. But the US $99 billion external debt figure is inflated. International investors are shying away from investing in India. And the finance minister is saddled with the difficult task of convincing his counterparts that after all it is not very bad out here. For, statistics is a game which can be easily manipulated and interpreted to suit ones needs.

Absolute numbers should be taken into account to derive whether India is actually slipping into a S E Asian like debt crisis.

Central bankers and the financial community put India's short-term debt at between 35 to 99 per cent of the forex reserves.

Maintain stable conditions
For the past few years, India's external debt situation has been comfortable. It has resulted from sound thinking and an effective management of policies by the monetary controlling authorities. Shanker Acharya, a leading monetary economist, has rightly pointed out that improvement of the various external indicators has not happened by accident or by chance but is a result of conscious sound policies.

But to maintain these stable conditions, India should be alert and learn from the experiences of South East Asia and avoid committing the same mistakes. It should also focus on non-guaranteed private debt and short-term debt. As famous international economist John Williamson says the proximate cause of the South East Asian crisis was the external debt structure and focus should be on restructuring the debt profile particularly the short-term debt component.

There is no doubt that a capital scarce country will borrow. But a limit should be set on such borrowings so that it does not become a macro threat. Williamson has rightly set some standards to judge the extent of indebtedness. An external debt GDP ratio of over 40 per cent, a debt export (or current receipts) ratio of over 200 per cent and a debt service debt ratio in excess of 25 per cent portend dangers for an economy.

Managing short-term debt
A look at the Indian debt figures shows that performance has been good on these counts. Many analysts hold that short-term debt should be avoided. However, if well managed, it could be availed of. But stockmarket shocks could trigger off a crisis if this component is not well managed. Fortunately for India, this has not happened. Short-term debt flows as a percentage of the total debt component are very small.

The East Asian crisis has triggered off global thinking on the short-term component in total debt. Short-term debt should be restricted to levels below the country's reserves. It should be transparent in nature and have a clear cut end-use mechanism if it is to play an active part. Currently, India's short-term debt stands at US $4 billion of the total foreign exchange reserves of US $40 billion. Deepak Mohanty, an expert, has rightly pointed out that capital flows could be beneficial or damaging depending on the end use.

High external liabilities
Why is India saddled with such huge external liabilities even when the economy has the capacity to absorb such large funds? Foreign capital is meant to supplement domestic resources by augmenting productive capacities. But, these resources could remain underutilised because of inappropriate macro policies. In such a situation, inflow of funds may result in needless accumulation of external liabilities. Why is it that East Asian economies have performed better than India? Well, it is only because India is not able to take on risk and is still shackled by a protectionist regime. But again, with the Indian short-term component being qualitative without predominance of volatile elements, there is nothing to worry on the external front. Only a foolproof system of reporting and appropriate monitoring are required.

Calculation misconceptions
Controversy concerning the calculation of debt continues. The Central Bank uses different definition to calculate debt which does not capture all the components of short-term debt. Whereas worldover, the short-term component assumes importance. This is the reason why the world feels that India is falling into a debt trap. The RBI follows the "original maturity concept" which takes into account all the debt amounts that have a maturity of less than a year under the original contract.

But what about components that fall under the "residual maturity concept"? Here, RBI omits borrowings from IMF, BIS and FIIs and says instalments that are due within a year on long-term loans should qualify as short-term debt. S S Tarapore argues that FCNR(B) and NRI deposits of less than one year ought to be included in short-term debt. Others argue that since they are held abroad they do not fall under the debt category.

Currently, we only look at debt service and debt to GDP ratio to judge a country's credit-worthiness. But S S Tarapore suggests that short-term debt should include portfolio stocks as a percentage of forex reserves. This ratio should not preferably exceed 60 per cent.

The World Competitive Report states India is the fourth largest debtor country. RBI is concerned about this and says that nearly 70 per cent of this debt is concessional. But is India's short-term debt high enough to warrant action? Does the economy have the capacity to withstand a sudden withdrawal of such lending? The trend today is more portfolio investments are flowing instead of more FDI inflows. Should this inflow be included in short-term debt?

To look at the true picture, many experts such as Rajawade argue that portfolio investments should not be counted as short-term debt. This, because there is no way investors can sell their entire portfolio overnight without bringing down the markets and in turn hurting their own interests.

Controlling authority
For India, problems started with the introduction of capital account convertibility. Initial excitement of inflow of foreign funds has faded only recently when the South East Asian currency crisis precipitated. All enthusiasm about market solutions proved wrong.

Today, a central bank can rein in an economy and could stretch its limits only till its forex position is restored. But, no economy, not even the IMF, is in a position to have global controls. All that can be done is to control global flows, restrict their movement and growth. A lesson that one can learn from the crisis of our neighbours is that a fair amount of caution needs to be exercised while borrowing from abroad.

All said and done, India still needs to have a specialised body to deal with problems relating to external debt. Today, the government is comfortable with India’s foreign currency deposits at US $23 billion. The government is now considering several options to reduce its external debt burden.The options under consideration include prepayment of its high-cost commercial loans using part of the foreign currency reserves or borrowing against the government’s burgeoning foreign currency deposits.

In the case of the former, there is no additional cost involved while in the case of the latter option the government would have to balance the interest cost on new borrowings against old. Prepayment would include a penal interest which would have to be worked into the government’s arithmetic of managing its external debt.The loans being shortlisted for prepayment include the high cost commercial loans taken from Japan and from multilateral agencies.

The government has appointed an agency to look into the matter. Borrowing against deposits is safer of the two options but the debt reduction impact would be much less using this route as against the other.Today, India is comfortable with US $23 billion in foreign currency assets and US $40 billion in overall forex reserves.

Of the total debt, the percentage of concessional debt is still high at 38.8 per cent, a fact from which the government draws comfort from. The share of government debt at the end of December 1999 stood at 47.4 per cent.

The Tarapore Committee has considered US $25 billion reserve level to be ideal for India. An oft-used thumb rule is that a country must maintain a reserve equal to its six month import cover. By all parameters, the government seems to be sitting pretty on US $10 billion worth of additional reserves which could now be deployed in alternative uses.

The total external debt in dollar terms has been stable during the last decade, increasing by 15.2 billion from end March 1991 to end March 1999. Today, India is much better off than most of the other emerging countries. The countries which are worse off than India in the external debt burden are Brazil, Russia, Mexico, China, Indonesia, Argentina and Turkey.

But, all said and done, India has made a progressive recovery on the external debt front. Indeed, the external debt front is satisfactory regardless of whether one does a trend analysis over the years or a cross-country comparison. India’s external debt to GNP at the end of 1998 is the second lowest after China among the top fifteen debtor nations in the world.

Of course, India, despite this improvement, is still continued to be reckoned among the moderately indebted rather than among the less indebted countries according to World Bank classification. But, India has a edge closer to the latter category provided we continue to exercise care in taking on external commitments. There is no reason why we should not soon join the ranks of the less indebted. Today, the government is trying its level best by keeping the short-term component of debt at a comfortable level.